2012 (1) TMI 313 - HC - Income Tax

Court affirms compensatory afforestation payment as revenue expenditure, not capital. Payment related to Supreme Court directive.

The Commissioner of Income Tax, Bangalore, & The Assistant Commissioner of Income Tax, Circle-I, Bellary Versus M/s Ramgad Minerals & MInings Pvt. Ltd., Bellary

The High Court upheld the decision of the Appellate Tribunal, confirming that the payment made for compensatory afforestation should be treated as revenue ... Contribution for Compensatory Afforestation - Captial or Revenue Expenditure - Allowable u/s 37(1) or not? - The respondent had paid some amount towards contribution for compensatory afforestation. The assessee relying upon decision of Supreme Court, contended that this is an expenditure incurred for the purposes of business and allowable u/S 37(1). According to AO -The assessee was permitted to carry out mining activity for the year under consideration only in the already broken up area out of total area and remaining area was undisturbed. As per the Mining Plan the assessee will first carry out mining only in Block A. Which will last for about 7 years and then block B will be taken up for mining activity. Hence the entire payment cannot be said to be an expenditure for the said financial year. Accordingly the said amount of expenditure is restricted to 1/14th HELD THAT- CIT (A) while confirming the order of assessing authority said that the funds are used for a natural regeneration which the assessee participates indirectly. Therefore at no point of time could it be said that the assessee had incurred a capital expenditure giving the assessee a benefit of enduring nature for the purpose of earning segmented income to render the same to income tax. The amount was incurred as a revenue expenditure and is directed to be allowed in the year it has been incurred. We, therefore, held that It is not in dispute that the said payment was made as contribution for compensatory afforestation as per the directions of the Supreme Court. It is not permissible for the assessee to make phase-wise payment. Order of CIT is thus sound and proper - Decision against Assessee. Issues:Assessing capital expenditure for compensatory afforestation contribution.Analysis:The case involved the assessment of a payment made by the respondent towards contribution for compensatory afforestation while obtaining a mining license in a forest area. The respondent treated this payment as capital expenditure for the financial year 2004-05. The Assessing Authority, in its order, analyzed the nature of the payment and the reasons provided by the assessee to seek the deduction as capital expenditure. The Authority observed that the payment was collected by the State Government as per the orders of the Supreme Court and was related to forest land diverted for non-forestry purposes under the Forest (Conservation) Act, 1980. The assessee argued that the expenditure was for the purpose of business and should be allowable under Section 37(1) of the Income Tax Act, 1961, citing relevant legal precedents.In paragraph 4.3 of the order, the Assessing Authority further explained the reasons for rejecting the request and limiting the expenditure to 1/14th of the total amount. The Authority noted that although the payment was for the assessee's business, it was not entirely attributable to the financial year under consideration. The payment was directly related to the leased area for mining, and the assessee derived enduring benefits from it to exploit the area for a specified period. As the assessee had only utilized a small portion of the area during the financial year in question, the Authority restricted the expenditure to 1/14th of the total amount paid.The Commissioner of Income Tax confirmed the Assessing Authority's order, and the Appellate Tribunal upheld the decision. The Tribunal emphasized that the payment was made for compensatory afforestation as directed by the Supreme Court and that it should be treated as revenue expenditure rather than capital expenditure. The Tribunal highlighted that the authorities had not shown any income generated against the deferred revenue expenditure proposed in their orders. Therefore, the Tribunal directed that the amount should be allowed as a revenue expenditure in the year it was incurred. Ultimately, the High Court dismissed the appeal, agreeing with the Tribunal's decision that the payment was made for compensatory afforestation and should be treated as revenue expenditure, not capital expenditure.